Likelihood of BOJ's additional easing in future

In light of recent downward revisions to the forecasts for US and Chinese economic growth and lingering high saving rates, the growth forecasts are lowered for the Japanese economy in 2015-16. 

However, according to Bank of America, the Japanese economy to remain on a recovery track, with support coming from four areas, 

(1) structural improvement in corporate earnings power, (2) improvement in business conditions in 2016 on more favorable terms of trade, (3) continued tightness in the labor market as growth of the service sector supports the uptrend in the numbers of employed workers, and (4) the strong likelihood that the Abe government will implement another stimulus package. 

Under those conditions, the inflation rate is also likely to improve to the mid-1% level in 2016. If the forecast proves correct, it will be a major achievement for Japan. However, the plummet in commodity prices complicates the achievement of 2% inflation growth, not just for the BoJ, but also for the FRB and the ECB. 

"Japan is unlikely to approach the 2% target until 2017. Consequently, a BoJ decision on additional easing later this year or early in 2016 strongly depends on data and market trends and that the market will continue to see a bias toward easing (the Kuroda put)", says Bank of America. 

However, it must be also noted that the comment by PM Abe at his recent press conference that a higher inflation rate is crucial to achieving his nominal GDP target of ¥600tn. In addition, given current economic trends, it is very aware that the BoJ will likely seek to fuel inflation expectations to support continued wage increases during the next spring labor offensive. 

Therefore a slightly greater than 50% likelihood is seen that the central bank will opt for additional easing in January and during 1H16. If it does, the most likely measures will be expansion of ETF and JGB purchases, with the latter including lengthening of the average duration of bonds eligible for purchase